The Chavez Spiral

Venezuelan dictator Hugo Chávez is losing altitude fast. Since his election in 1998 he's proved a deft manager of chaos--an oil strike, fierce political opposition, an army rebellion, food shortages, etc. He has been kept aloft by doling out oil revenues to satisfy the poor majority that forms his loyal base, to blunt the effects of economic mismanagement and to buy off the military and collaborating oligarchs, who reap the benefits of government sweetheart deals.

With petroleum prices down around $71 a barrel from a high of $147 the Venezuelan government is struggling to make up for the revenue shortfall to save programs that placate the poor by providing cheap food, fuel and other government giveaways. Making matters worse, the once mighty Venezuelan petroleum industry has been laid low by politicization, corruption and mismanagement; rather than producing 3.3 million barrels per day, industry analysts believe the production is closer to 2.3 million. Instead of maximizing profits by producing its quota, Venezuela's state-run oil fields are either underperforming or have collapsed altogether. Refining capacity also is in steep decline so Venezuela must import gasoline to meet internal needs--buying it at the market rate, selling it to domestic consumers at the much lower subsidized price and eating the difference.

Since late November, the Venezuelan state has had to intervene in about 10 banks, several of which were operated by Chavista cronies. These banks were favored by the regime to handle billions in Venezuelan government deposits. According to published accounts, these alleged crooked bankers were supposed to squirrel away these billions for Chávez, his family, government ministers, loyal military officers and other accomplices of his criminal regime. Instead, they stole and squandered the funds and came under the watchful eye of international regulators who have begun to freeze accounts in foreign banks. Chávez has moved in to scrape what is left of the cash and control the damage to the banking sector.

These related crises are mounting; the economy shrank 3% last year, inflation has risen to at least 25% today and the regime is running out of band-aids.

On Saturday, Chávez was forced to order a drastic devaluation in the national currency, which he hopes will relieve the government's budget woes. Under his plan, some basic necessities are supposed to remain available at a lower exchange rate, with other goods becoming twice as expensive. Critics say this dual system invites corruption and distorts the marketplace, while inflation is expected to rise another 3% to 5% and consumers will find it increasingly difficult to obtain imported goods.

Adding to the economic crisis is a drastic shortage of electricity. Last month Chávez ordered a rationing scheme after the state-run power company predicted a "national collapse" in April. He blames the crisis on a drought that has sapped the country's hydroelectric plant in the Guri Dam on the Caroní River. The problem is petroleum-fueled generators are failing too, with turbines lacking adequate fuel or shut down in disrepair. The electricity shortage is the result of gross mismanagement and underinvestment in the power sector to meet demand that has grown by 40% since 2002. Some experts say an $18 billion, multiyear modernization is required just to meet current needs.

The Venezuelan people also are enduring routine food shortages due to price controls that have discouraged domestic production and Chávez's repeated interruptions in trade with neighboring Colombia, upon which Venezuelans are increasingly dependent for consumer goods. With the blackouts disrupting domestic production and the currency devaluation, Venezuelans can expect increasing scarcity of the basic necessities of life.

As for life itself, Caracas has become by far the most dangerous city in South America; In September 2008 Foreign Policy magazine listed it among the "murder capitals of the world," noting that the homicide rate had grown by 67% since Chávez took power, even according to suspect official statistics. Chávez governs through cronyism and corruption to reward his friends and harass his opponents. His regime also conspires with drug traffickers who fuel criminal gangs that prey on innocent Venezuelans. This culture of lawlessness has gutted the police force and courts and undermined the quality of life of every citizen, rich or poor.

In the past, Chávez has been able to throw money at problems--to placate a restless public, suborn the military, turn out loyal mobs or overwhelm an opposition campaign. However, it is impossible to rebuild massive power generators, a professional police force, honest courts, crumbling roads and bridges from one day to the next. It also would take years to restore private food production and transportation capacity, even if the regime were to reverse its relentless hostility to the free market.

Although the Venezuelan people have found life increasingly unbearable, many of them have come to depend on the patronage of a strong state or remain suspicious of the traditional political leaders who have yet to present a viable alternative to Chávez.

While the regime scrambles to deal with the crises of its own making, this would be an opportune time for the democratic opposition to issue a pledge to restore Venezuela:

--The rule of law must return, beginning with an offensive against crime, the professionalization of the police and the courts and accountability of the state before the people.

--International giveaways to Chávez's client states must end, and funds should be returned to the Venezuelan people.

--Billions in stolen revenues must be recovered, which shall be used to rebuild the nation's crumbling infrastructure and to restore the oil industry.

--Collusion with drug traffickers, terrorist groups and criminal gangs that are waging war against Venezuelans and their neighbors must stop.

--Military and other security officials must be loyal to the nation rather than a destructive political project.

--Cubans, Iranians and other foreigners who are exploiting Venezuela must leave the country.

--No young Venezuelan should lose his or her life to wage war with Colombia, and peaceful ties will be cultivated with all democratic nations.

--A government of national unity, reconciliation and reconstruction must be built upon free and honest elections, beginning with election of a new National Assembly this year.

The only thing worse than a dictator is an incompetent one. Every day, more Venezuelans must recognize that that the current systemic crisis is unbearable, unsustainable and, if they say so, unnecessary. Chávez's engines are sputtering--the only question is whether Venezuelans are prepared to crash and burn with his regime.

Roger F. Noriega, a senior State Department official from 2001 to 2005, is a visiting fellow at the American Enterprise Institute and managing director of Vision Americas LLC, which represents foreign and domestic clients.